The other side of cheap oil PDF Print E-mail
Thursday, 28 June 2012 00:00
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Conventional logic has it that low oil prices are good for India as, apart from lowering inflation for both consumers and industry, they also lower fiscal and trade deficits. However, it turns out the relationship is not quite as simple and higher oil prices actually improve India’s balance of payments. Which is why though the price of Brent crude is down by around 27% from its peak earlier this year, the rupee actually depreciated 17% and the Sensex is down 7%.

Over the past two decades, and we could go back further, as global oil prices have risen, India’s capital account inflows have risen (see chart). While individual flows, like that from foreign institutional investors (FIIs) and banking capital (but not foreign direct investment or FDI), show a lot more volatility, the relationship is largely similar. The reason is simple: the same 'risk on' forces that makes investors flock to oil and raises oil prices favour an increase in FII and other such flows.

Between 2004 and 2005, oil prices rose from $40.50 a barrel to $59, and FII inflows rose from $9.3 billion to $12.5 billion; oil remained steady the next year but FII inflows fell to $7 billion; oil prices jumped 50% to $93.90 in 2007 and FII inflows shot up to $27.3 billion; oil halved in 2008 and FII inflows turned to outflows of $13.9 billion; oil recovered in 2009, as did FII flows, to $32.4 billion; oil rose further to $ 94.80 in 2010 but FII inflows fell marginally and when oil rose to $107.40 in 2011, FII inflows halved.

Banking capital fell from $3.9 billion in 2004 to $1.4 billion in 2005 when oil prices rose from $40.50 to $59, but when oil prices rose from $60.90 in 2006 to $93.90 in 2007, banking capital inflows jumped from $1.9 billion in 2006 to $11.8 billion in 2007.

When oil prices halved in 2008, banking capital inflows turned negative $3.3 billion and for the next three years, they rose in tandem with oil prices.

FDI, understandably, doesn’t have as close a relationship, but there have been periods of high oil prices and FDI rising – when oil prices rose from $60.90 to $93.90, FDI rose from $22.7 billion to $34.7 billion but it rose further the next year to $41.7 billion while oil prices halved, and it fell to $33.1 billion in 2009 while oil prices rose by 50%. Since FDI isn’t hot money and is more related to GDP prospects, the link to oil prices has to be through GDP and, by and large, the oil-to-GDP relationship is weak – this could either be due to increasing energy efficiency negating the impact of higher GDP prices or it could be due to the government, directly or indirectly, absorbing the impact of oil prices – so you don’t get to know the real picture.

Last Updated ( Friday, 06 July 2012 10:39 )

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